Remarks of Under Secretary for Terrorism and Financial Intelligence David Cohen before the New York University School of Law on “The Law and Policy of Iran Sanctions”

9/12/2012

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NEW YORK - It is
a great pleasure to be here at The Center on Law and Security at NYU School of
Law. Having spent 20 years practicing
law before I entered the Obama Administration, it is a real treat to speak to
an audience of law professors, lawyers and, especially, aspiring lawyers.

Before I turn to my main topic for this evening, I want to
pause for a moment to recognize and remember what transpired 11 years ago
yesterday, just two miles from here. The
horrific attacks of 9/11 had a profound impact – on our nation and our world,
on our sense of security, and on how we go about protecting our country.

Sadly, as we pause to reflect tonight on the tragic deaths
of those killed on September 11, we are also mourning the loss of four
Americans, including Ambassador Chris Stevens, who were killed in Benghazi,
Libya, yesterday. Ambassador Stevens and
the other Americans who lost their lives in Libya were dedicated public
servants, and as the President said today, they exemplified America’s
commitment to freedom, justice and partnership with nations and people around
the globe. Their deaths are enormous
loss for the United States, and a reminder of the sacrifices Americans make
every day around the world in the service of our country.

With this tragedy in mind, I hope my remarks tonight, and
the discussion that follows, will shed some light on the work the Department of
the Treasury is doing as part of these broader U.S. government efforts to keep
our country safe.

The office I lead in the Treasury Department – the Office of
Terrorism and Financial Intelligence – was created to better organize and align
our government’s efforts to combat terrorism and other national security
threats.

In essence, my job is to combat illicit finance – such as fundraising
by terrorist organizations and their supporters; money laundering by drug
cartels and transnational criminal organizations; and illicit financial transactions
that facilitate nuclear and ballistic missile programs.

Along with an extraordinarily talented and dedicated group
of intelligence analysts, policy advisors, sanctions investigators, and
regulators, we work to disrupt these illicit networks, protect the integrity of
the U.S. and international financial systems, and advance core national
security and foreign policy interests of the United States.

And I am so proud that one of our alumni, Zach Goldman – who
contributed in so many spectacular ways to our mission – is now the Executive
Director of this Center. You are all
very lucky to have him.

One of my key responsibilities is developing and overseeing
the implementation of economic and financial sanctions programs.

And although we have been using sanctions for many years against
terrorist financiers and WMD proliferators, the last several years have seen a
burst of intensity and creativity, as we have developed and deployed sanctions
programs on such diverse targets as Assad’s regime in Syria, transnational
criminal groups like the Brothers’ Circle and the Yakuza, and, of course, Iran.

This evening, I’d like to focus my remarks on our use of financial
pressure in an effort to persuade Iran’s leadership to change its calculus
about its nuclear program.

Speaking about this topic in a law school is particularly
appropriate, because we have used a variety of legal tools – some that are
quite innovative – to generate this financial pressure.

The Threat from Iran

No one questions that Iran is one of the most pressing
national security issues of our day.

It remains the world’s leading state sponsor of terrorism, sending
money and weapons to extremists across the globe.

The Iranian regime routinely abuses the human rights of its
citizens, while it exports repression through its Qods Force, by supporting HAMAS
and Hizballah, and, most recently, by providing critical assistance to the Assad
regime in its brutal attacks on the Syrian people.

And its nuclear program threatens the peace and security of
the entire Middle East and beyond.

Since coming into office in 2009, this Administration has
pursued a dual-track strategy in an effort to resolve the Iranian nuclear issue.

From the first days of the Administration, we extended a sincere
offer of diplomatic engagement to Iran – providing Iran with a path to reclaim
its place among the community of nations.

At the same time, we made clear that if Iran refused the
offer of engagement we, along with our partners in the international community,
would steadily yet rapidly apply increasingly powerful and sophisticated sanctions
on Iran.

We are working to make the choice for the Iranian leadership
as stark as possible: between genuine engagement, on the one hand, and
ever-increasing financial and economic pressure on the other, so that the
Iranian government recognizes that there is only one real option – to address,
in a meaningful and concrete fashion, the international community’s very
serious concerns about its nuclear program.

As I am sure you know, thus far the Iranian leadership has
not taken the opportunity offered to it.

And as a result, over the last few years, we have crafted and
implemented a series of sanctions – some in conjunction with our international partners,
and some that are complementary to steps taken by others – that have very substantially
ratcheted up the pressure on Iran.

The Impact of
Sanctions

Let me give you a sense of the impact that these sanctions
are having on Iran today.

Put simply, Iran’s economy is struggling. In part, this is due to the Iranian
government’s continued gross mismanagement of its domestic economy. And in part, it is due to the effect of
sanctions pressure.

Sanctions have hit Iran’s oil sector – by far its most
important industry – hard over the past year.

Last year, Iran exported approximately 2.4 million barrels
of oil per day to about 20 countries, making it the third largest oil exporter
in the world, and earning it about $100 billion from oil sales.

As a result of actions taken since the beginning of this
year, Iran’s crude exports have plummeted to approximately one million barrels
per day, a dramatic 55 percent decrease.

This decrease in exports is costing Iran up to $5 billion a
month, forcing the Iranian government to cut its budget because of a lack of
revenue.

Compounding this severe loss of revenue, Iran is also facing
the loss of access to the modern international banking system. Sanctions have effectively terminated international
access for most Iranian banks. This has
had a number of important effects.

With its banks increasingly unable to finance trade or
process international payments, it has become ever more difficult for Iran to
conduct business beyond its borders.

It has also made it much more difficult for the Iranian
government to access the revenue it is still able to earn from its oil sales,
multiplying the revenue loss from reduced sales volumes.

Today, the Iranian government is relegated to the backwaters
of the international financial system – and they know it.

Earlier this year, Iranian President Mahmoud Ahmadinejad lamented
that “Iranian banks cannot make international transactions anymore,” and just
last week he said the sanctions are “blocking off conduits. . . like the
conduits of selling oil and [accessing] foreign exchange.”

Perhaps the most dramatic reflection of the impact of
financial sanctions can be seen in the plummeting value of Iran’s currency, the
rial.

Over the past 12 months, the rial has lost more than half of
its value against the dollar. At this
time last year, it took about 12,000 rials to buy a dollar; last Sunday, it
took 26,000.

As its wealth has evaporated, the Iranian government has
tried in vain to stem the decline of the rial, including attempts to shut down
the currency exchange market in Tehran in an effort to prevent Iranian citizens
trading rials for dollars.

Macroeconomic indicators tell a similar story of economic
distress.

According to the CBI’s own calculations, Iran’s official
inflation rate is 27 percent – and with the rial plummeting, inflation is
likely to rise much higher.

The unemployment rate is officially estimated to be 17
percent – although, again, it is likely higher.

And according to the IMF, Iran’s GDP growth this year was
projected to be only 0.4 percent. The decline
in Iran’s oil receipts – which occurred after the IMF’s estimate – may well
yield negative GDP growth. In any event,
it will be down substantially from about 10% growth just five years ago, and far
below the performance of neighboring oil-exporting countries.

The financial and commercial effects of the sanctions,
combined with the Iranian government’s economic mismanagement, are beginning to
affect Iran’s domestic politics. Most
notably, in July the Supreme Leader – who had previously brushed off sanctions
– acknowledged “pressures” and urged Iranians to adopt an “economy of
resistance,” including such policies as “correcting consumption methods” to
limit demand while also “reducing Iran’s dependence on oil” for revenue.

The Arc of the
Financial Sanctions Effort

Clearly, the Iranian government now faces a complex and
daunting set of economic challenges, unquestionably due in part to the impact
of sanctions.

To understand how we have arrived at this point, I want to
trace for you the arc of these efforts, and point out some of the notable
changes in how we have gone about applying pressure on Iran – all in service of
this Administration’s overarching objective of preventing Iran from acquiring a
nuclear weapon.

When the Obama administration came into office in 2009, we inherited
the fruits of several years of strong U.S. efforts to apply pressure to Iran on
three fronts.

First, there was the near-total U.S. embargo on financial
and commercial relationships with Iran.

For close to two decades, American banks have been forbidden
from transacting directly with all Iranian banks, including the Central Bank of
Iran; American businesses have been forbidden from buying just about anything
from, or selling just about anything to, Iran; and American oil companies have
been forbidden from importing oil from Iran.

Second, we inherited a UN sanctions framework that imposed
multilateral sanctions on Iran.

A series of Security Council Resolutions, beginning in 2006,
not only highlighted serious concerns with Iran’s nuclear program and demanded
that Iran halt its uranium enrichment activities, but they also imposed sanctions
against dozens of individuals, firms and Iranian government agencies involved
in its nuclear and ballistic missile programs – including one major Iranian state-owned
bank.

And third, employing a targeted, conduct-based sanctions
strategy – in which we took action against particular actors involved in
illicit activity – Treasury had imposed sanctions by 2009 on more than a dozen
Iranian banks.

These targeted actions barred U.S. persons from transacting
with these designated banks and froze any of their assets that were within U.S.
jurisdiction. But just as importantly,
they exposed the illicit activities of those banks subject to sanctions.

Through a vigorous outreach and education effort, my
predecessors at Treasury made certain that the international business community
– in particular, global banks – were made aware of these illicit financial activities.

And although foreign banks are not generally obligated to
abide by these sanctions – they reach only U.S. persons and those operating in
the U.S. – many foreign banks, acting out of enlightened self-interest to
protect their reputations, chose to terminate relationships with sanctioned
Iranian banks.

A Strategic Shift:
Expanding the Conduct-Based Approach In the Dual-Track Strategy

By 2009, these efforts clearly had begun to have an impact
on Iran. Not only did they disrupt the
activities of those sanctioned, but we saw a growing economic impact on Iran,
particularly as many of its banks found it increasingly difficult to transact
internationally.

When President Obama took office, these efforts continued
unabated – and, indeed, have been expanded significantly. At the same time, President Obama put a
newfound emphasis on the engagement track of the dual-track strategy.

From his very first months in office, the President put
forward a very clear choice to the Iranian regime: a path that would allow
them to rejoin the community of nations if they meet their international
obligations, or a path that leads to an escalating series of consequences if
they don’t.

By late 2009, it was clear that Iran was not – at that
point, at least – prepared to engage meaningfully with the international
community.

This was demonstrated most plainly by the disclosure, in
September 2009, that Iran had begun work in secret on a new uranium enrichment
facility in Fordow. And it was confirmed
later that fall when Iran at first accepted, and then rejected, a deal to exchange
its stockpile of enriched uranium for the nuclear fuel it needed to manufacture
medical isotopes at the Tehran Research Reactor.

It was time to sharpen further the choice for Iran’s
leadership by developing and implementing truly “biting” sanctions against
Iran.

We did this in two principal ways, both of which broke new
ground.

First, remaining faithful to our conduct-based sanctions approach,
we took aim directly at Iran’s Central Bank (the “CBI”). We did so both because the CBI was complicit
in the illicit activity of Iran’s designated banks – and thus fair game under a
conduct-based approach – and also because it was a key node in Iran’s receipt
of oil revenue – and thus a particularly attractive target for sanctions.

Second, we amplified our efforts to isolate Iran’s
designated banks. Moving beyond our
appeal to foreign banks’ enlightened self-interest, we took a series of actions
that conditioned foreign banks’ direct access to the U.S. financial market on
their agreement not to deal with Iran’s designated banks.

The Multilateral Foundation:
UNSCR 1929

The first indication of this new approach can be seen in UN
Security Council Resolution 1929, adopted in June 2010.

Like prior Iran-related Resolutions adopted by the Security
Council, Resolution 1929 called on Iran to demonstrate the exclusively peaceful
nature of its nuclear program and to suspend uranium enrichment. It also imposed sanctions on individuals and
entities involved in Iran’s nuclear and ballistic missile programs.

But most importantly, Resolution 1929 laid the groundwork
for the enhanced sanctions measures that the U.S. and others have put in place
over the past two years.

In its preamble, Resolution 1929 spoke of the need for
member states to “exercise vigilance over transactions involving Iranian banks,
including the Central Bank of Iran, so as to prevent such transactions
contributing to proliferation-sensitive nuclear activities, or to the
development of nuclear weapon delivery systems.” It also “not[ed] the potential connection
between Iran’s revenues derived from its energy sector and the funding of
Iran’s proliferation sensitive nuclear activities.”

In doing so, the Security Council highlighted for the first
time the importance of Iran’s energy sector revenues and its central bank to
its proliferation activities.

Second, the Resolution contained several “hooks” that set
the stage for direct action to restrict Iran’s international banking
access.

It did so by calling on member states to prevent their banks
from providing financial services to Iran – including allowing correspondent
accounts between their banks and Iranian banks, or allowing Iranian banks to open
new branches in their jurisdictions – if there are “reasonable grounds to
believe” that these financial services “could contribute” to Iran’s nuclear or
missile programs.

Now you are all lawyers, or someday soon will be. Take a moment to ponder that evidentiary
standard – “reasonable grounds to believe” that financial services “could
contribute” to Iran’s proliferation activities.
As an abstract matter, that is not a terribly difficult standard to
meet.

And, as a practical matter, we had a wealth of information that
demonstrated how Iranian banks abused their financial access to facilitate Iran’s
proliferation activities – often using deceptive practices to try to mask the
involvement of designated proliferators and other illicit actors.

With the financial provisions of Resolution 1929 as a foundation,
we shared our information about Iran’s illicit and deceptive financial
practices with our partners around the world.

And in the summer and fall of 2010, the EU, the UK, Japan,
South Korea, Canada, Australia, Norway, and Switzerland took robust action to
restrict Iran’s banking activities. Other
nations took less formal or public – but still very strong – steps against Iranian
financial activity in the wake of Resolution 1929.

The New Domestic
Framework

CISADA

As Resolution 1929 was being drafted and adopted at the
United Nations, here at home we worked closely with Congress to craft the
Comprehensive Iran Sanctions Accountability and Divestment Act (“CISADA”),
which the President signed into law on July 1, 2010.

CISADA set a new precedent.
It gave the Secretary of the Treasury the authority for the first time to
require U.S. banks to terminate correspondent banking relationships with foreign
banks that knowingly engaged in significant transactions with designated Iranian
banks.

This is a particularly powerful provision. Access to U.S.-based banks is critically
important for many foreign banks because their ability to offer
dollar-denominated services to their clients depends on their ability to clear
dollar transactions through banks in the U.S.
Without access to the U.S. financial system, a foreign bank’s ability to
service its customers is significantly limited.

CISADA required foreign banks to consider much more than the
reputational risk involved in dealing with designated Iranian banks. It required them to contemplate the very
significant business consequences that would result from being cut off from the
United States if they chose to work with those two dozen Iranian banks that we
had sanctioned.

After CISADA’s enactment, my colleagues and I fanned out
around the globe to explain the new law, visiting or talking to government
counterparts in over 50 countries and representatives from more than 150
foreign financial institutions.

As we explained in these conversations, CISADA offered
foreign banks a choice: they could do business with banks in the U.S., or they
could do business with designated Iranian banks. But they could not do both.

The impact was dramatic.
Nearly everyone we spoke with readily recognized that there really was only
one choice – to terminate relationships with designated Iranian banks. And those that did not appear to recognize
this – like Kunlun Bank in China and Elaf Islamic Bank in Iraq, both of which have
now been cut off from the United States banking system – have learned that we are
quite serious about the choice to be made under CISADA.

As I said, CISADA was novel and innovative, but it was not,
as some have claimed, extraterritorial.
It does not purport to regulate foreign banks. To the contrary, it provides authority to the
Secretary of the Treasury to regulate U.S. financial institutions, limiting our
banks’ ability to transact with certain foreign banks.

The Central Bank of Iran

Now, once CISADA was in place, we turned our attention to the
Central Bank of Iran – the key to Iran’s oil revenues because, under Iranian
law, it is the only bank authorized to receive payments for Iran’s oil sales.

In the spring of 2011, we began discussing with our closest allies
the possibility of imposing international sanctions on the CBI. We made the case that isolating the CBI was warranted
because of the role it played in Iran’s illicit activity, and that imposing
specific sanctions on the CBI – the recipient of Iran’s oil revenues – would be
a particularly effective way to ramp up the pressure on Iran.

Following through, in November 2011 we issued a formal finding
under Section 311 of the USA PATRIOT Act that the entire jurisdiction of Iran,
including the CBI, was a “primary money laundering concern.”

In that finding, we focused on much more than Iran’s
abundant anti-money laundering deficiencies.
In a key passage, we described the CBI’s role in funneling billions of dollars
to designated Iranian banks and in engaging in deceptive practices to conceal
those payments.

The same day we acted, the UK and Canada took action to forbid
almost all financial transactions between their banks and all Iranian banks,
including the CBI. The campaign to
isolate the CBI was well underway.

Then, a little more than one month later, the President signed
the National Defense Authorization Act for Fiscal Year 2012 (the “NDAA”), which
set the stage for additional pressure against the CBI and Iran’s oil
revenues.

The relevant provision in the NDAA, Section 1245, is complex. It builds on the CISADA model by limiting direct
access to the U.S. financial system for foreign banks involved in paying the
CBI for oil or other goods, unless the foreign bank’s home country
significantly reduces its oil imports from Iran.

As I said, it’s a complicated piece of legislation, so let
me say that again. Under Section 1245, foreign
banks involved in significant transactions with the CBI – including making payments
for Iranian oil – can be cut off from the United States banking system unless
their home jurisdiction has significantly reduced its oil imports from Iran.

The purpose of this legislation is clear enough. It leverages foreign banks’ desire to have
access to the U.S. financial system to drive down Iran’s oil revenues. Section 1245 thus provides a powerful
incentive for countries that import oil from Iran to reduce their imports –
namely, if they significantly reduce their Iranian oil imports, their banks
will be protected, for a period of time, against the possibility of sanctions
for transactions with the CBI.

As we did after the enactment of CISADA, we have spent a
great deal of time over the past nine months meeting with foreign counterparts
in both the public and private sectors to explain Section 1245 and – along with
colleagues from the State and Energy Departments – to encourage importers of
Iranian oil to protect their banks from sanctions by significantly reducing
their imports.

And as in the aftermath of CISADA, the response has been
quite positive. Every country that
imported oil from Iran as of the beginning of this year has taken steps to
significantly reduce the volume of their Iranian oil imports – driving down
Iran’s oil revenues.

The Path Ahead

So that brings me back to where I began, with the impact of
these measures on Iran.

The combined impact of the sanctions adopted over the last
several years by the U.S. and our partners around the world clearly got the attention
of Iran’s leadership. Taking aim at Iran’s oil revenues, combined with
squeezing Iran’s access to the international financial system ever more tightly,
created a dynamic that encouraged Iran to come to the negotiating table earlier
this year.

So along with the Germany and other permanent members of the
UN Security Council – the P5+1 – we have met with the Iranians four times since
April.

We came to these meetings ready to explore a path to a
negotiated resolution, but Iran’s response to date has been a non-starter. We believe that, while not limitless, there
remains time and space for a diplomatic solution if Iran’s leadership takes the
strategic decision to make meaningful concessions. But let’s be clear: The onus is on Iran.

And as we have clearly signaled all along, if Iran is not
prepared to negotiate meaningfully about its nuclear program, we will increase
the cost of Iran’s intransigence.

And that is precisely what we have done.

At the end of July, the President issued an executive order imposing
new sanctions on Iran.

This order tightens the rules related to payment for Iranian
oil to make doubly sure that Iran is only able to sell its oil to countries
that are significantly reducing their imports of Iranian oil.

It also tightens the rules regarding the sale of Iranian
oil. Under the new order, any party that
acquires oil from Iran – including brokers, traders and other middlemen – is subject
to sanctions, again if that party is not located in a jurisdiction that is
significantly reducing its oil imports from Iran.

Moving beyond Iran’s oil exports, the new executive order authorizes
sanctions against anyone involved in the import of petrochemicals from Iran – a
multi-billion dollar industry for Iran, second only to its oil industry.

And it also authorizes sanctions against anyone assisting
Iran in acquiring precious metals, such as gold, as well as physical U.S.
currency.

Less than two weeks later, in early August, the President
signed another piece of legislation, the Iran Threat Reduction and Syria Human
Rights Act, that builds on our robust sanctions regime.

There are dozens of powerful provisions in this new law, but
let me highlight just one – section 504.
This provision seeks to limit what Iran can do with the revenue it earns
from its oil sales.

In essence, Section 504 is designed to require Iran to deposit
its oil revenue within the country where it is earned, and to prevent Iran from
moving that revenue around the global financial system or repatriating it to
Iran.

Because almost all of the countries that purchase oil from
Iran run a significant trade deficit – that is, they import more from Iran than
they sell to Iran – this provision should “lock up” a significant portion of
Iran’s earnings in each of these countries.

Conclusion

In short, as long as Iran continues to reject the path to a
negotiated resolution, we will continue vigorously to pursue the pressure
track.

As I have tried to sketch out, we have in place now an
enormously powerful set of sanctions, at home and around the world. It retains its essential conduct-based
foundation, as it broadens out to target an ever more comprehensive set of
Iranian financial and economic activities.

We will continue to devise new and enhanced sanctions – so
long as Iran refuses to address in a meaningful and productive way the very
serious concerns with its nuclear program.

And the impact from sanctions will only increase over time –
as the financial sanctions continue to bite, the oil-related sanctions continue
to drive down Iran’s oil sales, potential workarounds are stymied, and our partners
continue to take complementary action.

We believe it is still possible to prevent Iran from
achieving its goal through a combination of diplomatic and economic efforts. But while the diplomatic window is still
open, there should be no doubt that it will not be open indefinitely, and that
all options remain on the table to prevent Iran from obtaining a nuclear
weapon.

Thank you.

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